Thanks Ben! Now What?
So far the markets have survived the event risk of the last two days as everything that occurred was expected. The Fed’s announcement of $600 Billion of QE2 has sent markets flying higher as risk appetite is very aggressive today. World stock markets are higher across the board, as are commodities. Gold alone is up close to 2.5%!
So this is all a good thing for the economy, right? Not so fast. This is good for Wall St. and those who still have jobs and investible income, and not for the 9.6% of the population that is still unemployed and looking for work. We see again today another 457K people received pink slips last week, and I’m sure they are not benefitting from higher oil prices.
The problems that we face in the US economy are not there that there is not enough cheap money; the problem is there is a lack of demand because unemployment is high. Companies are not hiring additional workers because of the unfriendly business environment created in Washington DC and also because of the uncertainty surrounding taxes, regulation, and the healthcare bill.
A weary looking and seemingly shell-shocked President Obama couldn’t bring himself to admit as much yesterday, despite the overwhelming evidence as seen through the eyes of voters. The No. 1 priority in the US should be putting people back to work. The agenda under the current administration was misguided and mishandled and as a result the people and thus the overall economy suffer. So the Fed decided to provide more money in the event that the economy begins to turn around.
Meanwhile in the UK and in Europe, Central Banks kept policy unchanged as the path these two regions are on is much more economically responsible than what we are seeing here in the US. As the value of the Dollar has decreased due to QE2, both the Pound and Euro are higher as well.
In the forex market:
Aussie (AUD): The Aussie is higher as risk appetite is soaring this morning as the market is expecting continued Dollar weakness and inflation around the globe. However, retail sales figures came in lower than expected, as did the trade balance figures.
Kiwi (NZD): The Kiwi is the big winner this morning as the unemployment rate in NZ came in much better than expected. The unemployment rate came in at 6.4%, which is .5% less than last quarter and better than the expectation of 6.7%. Receiving the added “benefit” of risk appetite, the Finance Minister claimed that they are being squeezed by “two giants” namely the US and China and that a higher Kiwi may hurt their exports. Kiwi at a 2-year high to the Dollar. (Click chart to enlarge)
Loonie (CAD): The Loonie came within 10 pips of parity with USD as risk appetite and higher oil prices to 86.26 are stoking demand for the currency.
Euro (EUR): The Euro is also higher this morning as the ECB maintained current monetary policy despite the Fed action yesterday. PMI figures came in mixed and there are thoughts that because of US action, they may have to remain accommodative for a longer period of time as debt concerns still persist in the region. At this point, a full retracement to 1.50 vs. USD seems likely. (Click chart to enlarge)
Pound (GBP): The Pound is also higher as the BOE decided to not follow the Fed down the road to destruction as they maintained their current policy as was largely expected. In addition, home price figures came in higher than expected demonstrating that inflation may be higher which would support higher rates rather than further QE.
Dollar (USD): Not surprisingly, the Dollar is weaker across the board as the effects of the QE2 announcement are just starting to make it to the marketplace. As we can see, both stocks and commodities are higher, and despite Bernanke’s claims that inflation won’t be an issue, I think he may be sorely mistaken.
Yen (JPY): The Yen is showing some weakness against all but the Dollar and the two-day BOJ meeting may still produce some further measures to try to weaken the Yen. Unfortunately for Japan, the “don’t fight the Fed” mantra couldn’t be truer.
So what happens now? Well for starters I think we see global inflation as hot money goes on a yield seeking mission to find growth. This is bound to cause inflation around the globe and drive emerging market currencies higher. Already these countries are trying to concoct ways to slow down the hot money but barring straight out protectionism, this may be hard to do. This will eventually hurt their exports and cause more boom and bust scenarios.
However, protectionism may be the likely result of further Dollar weakness, as just North in Canada they government blocked a proposed takeover of a Canadian commodity company claiming it was a national asset.
Meanwhile, will the Fed be able to control inflation here in the US? I highly doubt and think we are going to see bouts of biflation; where commodities like food and energy are higher, with housing continuing to decline. With so many people unemployed, many will be unable to afford the basics and will either require further government assistance or go without. However, Bernanke will turn a blind eye to it as he can strip out food and energy and claim that there is no inflation.
So at this point, I am not sure what it will take for interest rates to rise. The Dollar could strengthen as global instability causes a flight to safety, but otherwise the Dollar is doomed.
So learn to protect yourself through the forex market, to try to hold on to any value you may have left!
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